MADRID (Reuters) - Socialist head Pedro Sanchez was named on Tuesday by King Felipe to lead talks to form a government in Spain, although chances of success are slim as he would need to strike a deal with several parties whose policies are incompatible.

Sanchez said he accepted the king's offer to negotiate a potential coalition government with other political parties because he wanted to break political deadlock and avoid a new national election in the next few months.

Spain has been without a government since inconclusive parliamentary elections on Dec. 20, and talks to resolve the situation have made little headway so far.

Acting Prime Minister Mariano Rajoy was picked after a first round of talks with the king last month because his conservative PP won most votes in the election.

But he deferred a parliamentary confidence vote on a new government because he lacked the support to win it. Rajoy said he had told the monarch on Tuesday he still had no majority to form a government and was not offered the nomination this time.

Sanchez said he would open talks with all parties - including Rajoy's People's Party (PP) - as of Wednesday, although he would not actively seek the backing of parties that favour Catalonia's independence from Spain.

"The socialist party rises to the challenge with Spain so that the citizens of this country can have a government more than 40 days after the election and that rules through dialogue and for the benefit of all," Sanchez told a news conference.

"It's a new political era, with a parliament with more than two parties, with new dynamics, new problems and new solutions," he also said.

SLIM CHANCES

Having ruled out a coalition with the PP and with senior members of his party opposing a deal with anti-austerity Podemos and regional parties, the socialist leader's chances of success look slim however.

The Socialists could potentially achieve a majority by teaming up with Podemos and other leftist and regional parties, but they have different views on fundamental issues such as whether to organise an independence referendum in Catalonia.

Given Spain's unprecedented parliamentary fragmentation, a minimum of four parties would have to agree on a joint program while several others would have to abstain, heralding arduous and long talks.

Sanchez said he would need at least one month before he can seek the confidence of the parliament.

Newcomer parties, anti-austerity Podemos and centrist Ciudadanos, said on Tuesday they were ready to sit down and discuss a potential agreement with the Socialists, although none of them has enough votes to secure a stable majority.

However, while Ciudadanos leader Albert Rivera said he would extend an open hand to Sanchez to try to open "a thrilling new chapter" in Spanish politics, Podemos leader Pablo Iglesias said the Socialists had only two options.

"One is a grand coalition that implies an agreement with the PP and Ciudadanos and the other is an option of progress with us and (former communists of) Izquierda Unida," he said.

Meanwhile, Rajoy, whose PP fell well short of a majority in December, said he still favoured a grand coalition with the Socialists and Ciudadanos but that option was currently not possible because Sanchez opposed it.

Nevertheless, Rajoy said he did not rule out seeking the confidence of the parliament at a later stage depending on the course of events over the next weeks.

Under Spain's constitution, a two-month deadline to form a government comes into effect once this first vote takes place. If that deadline expires a new national election is called.

With the country's economic recovery still showing strong momentum and politicians facing little or no pressure from financial markets and business leaders to end the stalemate, few would now bet heavily against that outcome.